OPINION: Twin Peaks is a step closer to realisation

JOHANNESBURG - The South African financial services sector has had a new “sheriff” since April 1, when the Financial Sector Conduct Authority (FSCA) replaced the Financial Services Board (FSB). Here is what you need to know about this development.

The change from the FSB to the FSCA is a further step on the path towards implementing the “Twin Peaks” model of financial sector regulation in South Africa.

To date, South Africa has had an “integrated” approach to financial regulation, with the FSB acting as a “super-regulator” responsible for regulating the conduct of financial market participants and the prudential soundness of financial institutions.

The main advantage of the super-regulator approach is that it enables the focused use of resources, notably personnel, in countries where these resources are scarce.

However, critics argue that market conduct and prudential regulation require fundamentally different approaches and cultures, and note that no country that has adopted Twin Peaks has reverted to a super-regulator model.

South Africa has implemented Twin Peaks through the Financial Sector Regulation Act, which has come into force, but is only partially in effect.

Two regulators

The twin peaks of regulation in South Africa will be:

* Market conduct regulation, including investment funds and investment managers, which will be the domain of the FSCA; and

* The regulation of financial institutions, including banks, which will be the domain of the Prudential Authority (PA), housed in the South African Reserve Bank.

The shift from the current sectoral licensing model to a more centralised, activity-based licensing model has not yet been adopted. This will follow the implementation of a new licensing regime, which will focus on the activities that a prospective licensee wants to perform, rather than on particular sectors of the market.

The Conduct of Financial Institutions (Cofi) Act will define these activities in a single, overarching law and will replace the Financial Advisory and Intermediary Services Act.

Financial institutions, including entities currently regulated as financial services providers, will need to hold a licence from the FSCA to render a financial service in respect of the specific, defined activities they perform. The National Treasury has set up a panel to develop the Cofi Bill, and it is expected that the first draft will be distributed for comment around the middle of this year.

The parameters of licensing under the Cofi Bill have not been finalised, but current discussions have contemplated that:

* A “one-size-fits-all” approach will not be taken to licensing. The requirements for licensees will be proportionate to the risks underlying the business activities of different entities.

* The FSCA will enter into memoranda of understanding with other regulatory authorities, including the PA, so that there is clarity as to the requirements applying to licensees that fall under the supervision of multiple regulatory authorities.

It will take some time for the draft Cofi Bill to be finalised. Until then, the licences issued by the FSB will remain in force and the licensing of new entities will continue to take place under the existing financial sector laws, although those “old” laws will be implemented by the FSCA.

Shayne Krige is the director and head of investment funds at Werksmans Attorneys.

- The views expressed here are not necessarily those of Independent Media.